EUR/GBP: Euro Expected to Incline as ECB Seen on Hold

The Euro is seen to gain opposite the British pound today as the European Central Bank is expected to keep interest rates on hold at a record low 0.75 percent as the Euro Zone economy shows some positive signs of stabilization and inflation remains above target. In contrast, disappointing trade figures from the UK are deemed to suggest that trade activity became a drag on the British economy in the fourth quarter.

Convening for the first time this year, the ECB is likely to leave rates unchanged for a sixth consecutive month amid tentative signs that the Euro Zone’s battered economy is bottoming out. Although the 17-nation bloc is in recession, recent economic data suggest some stabilization, and ECB President Mario Draghi could express a slightly more positive tone as he speaks to the press after the rate decision. While the ECB held a “wide discussion” on reducing rates last month, the grounds for such a move have not grown since and Executive Board member have argued against a cut.

Last week, the closely watched Purchasing Managers Index for the entire Euro area rose to a nine-month high, offering optimism that the economy could be moving out of its deep double-dip recession. Recent data for Germany, Europe’s largest economy, have also come in better than estimated. Business morale has also improved, giving tentative signs that the worst o the downturn is already behind. Although the central bank sees inflation falling below 2 percent this year, price pressures have eased more slowly than initially expected. Inflation has been above the 2 percent target for more than 2 years now. ECB member Yves Mersch also dampened rate cut expectations last month by saying he did not see the logic of a debate about slashing rates. Considering this outlook, the single currency is apt to rise today.

In the UK, the ONS reported that the nation’s trade deficit narrowed less than expected in November and held above its average for the past year, raising that likelihood that trade activity in Q4 dragged on economic growth. The trade gap shrank to 9.12 Billion Pounds from October 9.5 Billion Pounds as exports rose faster than imports. Nonetheless, the figure failed to meet expectations of a fall to 9.1 Billion Pounds. Trading with the EU rose considerable in November, but even so, exports of traded goods to EU countries were still down by 5.9 percent year-on-year in the three months to November. According to analysts, with the minimal improvement in the figures, net trade looks to have been a drag on Q4 GDP growth, corroborating evidence that the economy contracted during the quarter. Considering these, a long position is advised for the EUR/GBP trades today.